So mutual funds are funds which have exposure to a variety of assets to reduce the risk. But there are mutual fund companies (like BlackRock) in which people can invest into, and they determine a portfolio (depending on the person's need). But at the same time there are funds which already determined like Vanguard 500 Index, but they are also called a mutual fund.

I want to know what the difference is between funds which are already determined (much like an ETF) and "mutual funds" in which people can invest into.

BlackRock isn't a mutual fund company, it is an asset management compnay. That is why you can have a customized portfolio.
– DumbCoderDec 9 '12 at 20:58

@Josh - You seem to be asking about the difference between Mutual Funds that have a general stated goal, and those that are index followers. Am I reading this correctly?
– JoeTaxpayer♦Dec 10 '12 at 0:59

Yeah a general Mutual Fund and not necessarily an index tracker, but a fund which has a per-determined set of asses.
– JoshDec 10 '12 at 3:36

@DumbCoder ? Yes, BlackRock does do asset management, but it is also (arguably) the biggest issuer of mutual funds in the world. Particularly if you include their iShares ETF business.
– thepassiveinvestorDec 18 '12 at 14:23

Some financial companies offer services for individuals to construct a portfolio if one has sufficient assets. I imagine I could walk into Fidelity with $10,000,000 and they would have advisers that would make me portfolios that is completely different from the funds that Fidelity family of mutual funds. This is the difference between looking at General Motors as a company and looking at the success of a Corvette which is just a product from one of GM's subsidiaries.
– JB KingApr 10 '14 at 17:17

2 Answers
2

I think you are asking about actively managed funds vs. indexes and possibly also vs. diversified funds like target date funds. This is also related to the question of mutual fund vs. ETF.

First, a fund can be either actively managed or it can attempt to track an index. An actively managed fund has a fund manager who tries to find the best stocks to invest in within some constraints, like "this fund invests in large cap US companies". An index fund tries to match as closely as possible the performance of an index like the S&P 500.

A fund may also try to offer a portfolio that is suitable for someone to put their entire account into. For example, a target date fund is a fund that may invest in a mix of stocks, bonds and foreign stock in a proportion that would be appropriate to someone expecting to retire in a certain year. These are not what people tend to think of as the canonical examples of mutual funds, even though they share the same legal structure and investment mechanisms.

Secondly, a fund can either be a traditional mutual fund or it can be an exchange traded fund (ETF). To invest in a traditional mutual fund, you send money to the fund, and they give you a number of shares equal to what that money would have bought of the net asset value (NAV) of the fund at the end of trading on the day they receive your deposit, possibly minus a sales charge. To invest in an ETF, you buy shares of the ETF on the stock market like any other stock. Under the covers, an ETF does have something similar to the mechanism of depositing money to get shares, but only big traders can use that, and it's not used for investing, but only for people who are making a market in the stock (if lots of people are buying VTI, Big Dealer Co will get 100,000 shares from Vanguard so that they can sell them on the market the next day).

Historically and traditionally, ETFs are associated with an indexing strategy, while if not specifically mentioned, people assume that traditional mutual funds are actively managed. Many ETFs, notably all the Vanguard ETFs, are actually just a different way to hold the same underlying fund.

The best way to understand this is to read the prospectus for a mutual fund and an ETF. It's all there in reasonably plain English.

Mutual funds buy (and sell) shares in companies in accordance with
the policies set forth in their prospectus, not according to the
individual needs of an investor, that is,
when you invest money in (or withdraw money from) a mutual fund,
the manager buys or sells whatever shares that, in the manager's judgement,
will be the most appropriate ones (consistent with the investment policies).
Thus, a large-cap mutual fund manager will not buy the latest hot
small-cap stock that will likely be hugely profitable; he/she
must choose only between various large capitalization companies.

Some exchange-traded funds are fixed baskets of stocks. Suppose you will not
invest in a company X as a matter of principle. Unless a mutual fund prospectus
says that it will not invest in X, you may well end up having an investment in X
at some time because the fund manager bought shares in X. With such an ETF,
you know what is in the basket, and if the basket does not include stock in X
now, it will not own stock in X at a later date.

Some exchange-traded funds are constructed based on some index and
track the index as a matter of policy. Thus, you will not be investing
in X unless X becomes part of the index because Standard or Poor or
Russell or somebody changed their minds, and the ETF buys X in order
to track the index.

Finally, some ETFs are exactly like general mutual funds except that
you can buy or sell ETF shares at any time at the price at the
instant that your order is executed whereas with mutual funds, the
price of the mutual fund shares that you have bought or sold
is the NAV of the mutual fund shares for that day, which is
established based on the closing prices at the end of the trading day
of the stocks, bonds etc that the fund owns. So, you might end
up owning stock in X at any time based on what the fund manager
thinks about X.

I believe OP was asking for the distinction between say a Fidelity Magellan (actively traded) and a Vanguard 500 (low cost, functioning very similar to ETF.)
– JoeTaxpayer♦Dec 9 '12 at 20:26

@JoeTaxpayer In my opinion, "They determine a portfolio (depending on the person's need)" is the key point (and misconception) that needs to be addressed, and I believe the first paragraph of my answer serves this purpose. Neither the constituents (nor the relative weightage of the parts) of a mutual fund's portfolio of stocks is tailored to an individual investor's needs. One cannot invest, say $10K in a mutual fund and tell the manager that one needs to have that 50% of the investment to be in stock X and 50% in stock Y; that's what one uses a brokerage for.
– Dilip SarwateDec 9 '12 at 21:03

So what about products like Vanguard, those that don't categorize as ETFs or ETNs? Aren't they also Mutual Funds, with assets already determined and fixed.
– JoshDec 9 '12 at 22:00

2

Vanguard is a company that runs many mutual funds: some are actively managed, some are index funds, some are ETFs, some are bond funds, some are bond index funds, some only invest in a segment of the market, some are based on size of company. Most people invest in fund run by a company, they don't invest in the company that runs the funds.
– mhoran_psprepDec 9 '12 at 22:10

1

This is approximately true in practice, but active management vs. indexing is a separate dimension from ETF vs. mutual fund.
– Kevin PetersonDec 11 '12 at 8:21